Bank of Baroda: Faster reduction in credit costs may lead to re-rating

Bank of Baroda is an Indian state-owned International banking and financial services company | Photo: Shutterstock
Bank of Baroda (BoB), now also comprising Vijaya Bank and Dena Bank, caught the eyes of investors, with its stock gaining over 4 per cent on its debut as a merged entity on Monday. As the advantages of the merger, which include the amalgamated entity being elevated as the second largest public sector bank and third largest lender in terms of balance sheet, are well-known to investors, the focus hereon shifts to the bank’s growth and asset quality.

The Street, for now, is divided over these factors. Analysts at Credit Suisse have in a recent report, slashed their earnings target for the merged entity by 23-38 per cent, citing high credit cost and slower growth. Credit cost is defined as bad loan provisioning as a percentage of the total loan book. While in absolute terms the brokerage has increased its target price on BoB's stock from Rs 110 to Rs 115 due to the recent capital infusion, it maintains ‘underperform’ recommendation as it awaits clarity on growth and management continuity of the merged entity. Interestingly, Credit Suisse pencils a credit cost of 1.7 per cent for FY20, which it says may be significantly higher compared to the anticipated 1-1.2 per cent for corporate banks under its coverage.


But not all analysts agree on these estimates. “Given the Rs 4,700-crore exposure to the troubled IL&FS companies and each of the banks merging into BoB continuing to mend its asset quality, credit costs will stay high. However, the Street isn’t factoring in for something more 1.4-1.5 per cent in FY20,” says an analyst with a domestic brokerage. His faith comes from the fact that ahead of the merger, each bank had been substantially provided for bad assets, and if no fresh shocks emerge, the merged entity would see a moderation in provisioning by the December quarter of FY20. Likewise, loan growth is expected at 10-14 per cent given the improving disbursement trend.

While the jury is out on how credit cost and growth play out, analysts say these two factors will be key to further re-rating of the BoB stock in the coming quarters. Trading at 0.7x FY20 book, BoB is currently a preferred stock among public sector corporate lenders for most brokerages.

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